Speech

at the launch of the Economic Analytical Unit report Changing Corporate Asia: What Business Needs to Know

Sydney Renaissance Hotel, Sydney, 7 March 2002

Change in Corporate Asia: What it Means for Australia

Introduction

Thank you, John (John Hall, CEO, Australian Institute of Company Directors). Your Excellency, Mr Sudjadnan Parnohadiningrat (Indonesian Ambassador to Australia), distinguished guests, ladies and gentlemen. It gives me great pleasure to welcome you here to launch the report Changing Corporate Asia: What Business Needs to Know.

I congratulate Dr Frances Perkins and her team in the Economic Analytical Unit of the Department of Foreign Affairs and Trade. I thank PricewaterhouseCoopers and PricewaterhouseCoopers Legal for their valuable contribution to this report. I also want to thank BHP Billiton for their ongoing support of EAU research, and AusAID for their generous sponsorship of this report.

Today's launch gives me the opportunity to discuss the significant changes underway in East Asia's corporate sectors, and the impact these may have on Australia's interests with the region.

Importantly, the transition underway in many East Asian corporate sectors - to a more rules based business model - promises renewed and sustainable economic growth. Importantly, it also could offer a business environment more open and familiar to Australian business.

The Importance of Asia

Over the past 30 years, East Asia's rapid economic development dramatically reduced poverty levels and provided the foundations for emerging democracies in the region. Australia benefited, and continues to benefit, from this dramatic transformation.

East Asia's success also made a persuasive, and so far enduring, case for the benefits of globalisation. It offered strong support for an export-oriented, market-driven model of development. Without exception, the successful economies in the region opened themselves up to international markets, rejecting protectionism for trade liberalisation. They also opened up to foreign investment, allowing local people to gain access to foreign savings, technology and links with the global economy.

However, in much of East Asia, recent key events - including banking crises in Japan, China and other regional economies during the Asian financial crisis - are forcing governments and corporations to re-evaluate whether past approaches to business will deliver new investments and economic growth.

In 2000, foreign investment inflows to the key East Asian economies, apart from China and Japan, declined by 17 per cent from levels before the crisis. This suggests international investors have less confidence in these economies, and in the ability of East Asian business models to offer a good return on investments. In most economies, growth has slowed to a fraction of that recorded before 1997.

Relationships versus Rules

Many factors contributed to poor economic outcomes in most East Asian economies over the past five years. These include the slowdown in world growth, particularly in the United States, and the collapse in demand associated with the end of the IT boom.

Amongst these factors, the EAU report singles out the traditional relationship-based model of doing business in East Asia as contributing to economic difficulties. Relationships are key to doing business in many East Asian economies. They show up as close, even formal, associations between banks and firms, family corporate owners, board members and management, and sometimes between governments and corporate owners.

For many decades this model worked. Moreover, in many economies, insufficient and ineffective commercial regulations and laws made close relationships the best way to do business. However, in the years leading up to the crisis, this approach led to many poor investment decisions. Those decisions ultimately contributed to high levels of non-performing loans, and widespread insolvency. And these in turn continue to hamper recovery in many East Asian economies.

The report highlights efforts by governments and corporations in the region to develop an alternative approach to doing business. One in which relationships are less important. And one in which business opportunities are judged not by who is behind them, but by their commercial quality. Under this approach, commercial rules and regulations are enforced and market participants, including minority shareholders, creditors and consumers, will be protected.

A rules-based business environment is essential for market economies to develop and grow. Shareholders, creditors, investors, input suppliers and consumers need to feel safe doing business with people they don't know. The markets they create will ensure savings go to the best investments, maximising growth and living standards.

Why this Matters to Australia

There can be little doubt that East Asian success in reinventing business models is vital to Australia's interests. Our interests in this area comprise several distinct parts.

First, fast growing neighbours provide new and growing opportunities for our exporters and investors. Last year, East Asia accounted for 54 per cent of our total exports, equal to 9 per cent of our national income.

Second, history teaches that balanced and sustainable economic growth provides the long-term foundations for reducing poverty. This in turn supports political stability and increases regional security.

Third, if key East Asian economies continue to falter, support for pressing ahead with opening markets to trade and investment may erode. That would be an extremely worrying development for an open economy like Australia.

Fundamentally, if a rules based business model continues to develop in East Asia, it will be particularly effective in promoting prosperity and stability in the region.

Transparent and fair rules for doing business promote increased community participation in economic activity, improve income distribution and help develop more stable and participatory democracies.

Rules-based business increases scope for regional integration, as companies will be more confident when doing business with foreigners. This should expand the shared commercial interests of East Asian economies and Australia, reducing the risk of internal regional friction and increasing regional prosperity.

And better rules governing East Asian corporate sectors should encourage international capital to return to crisis affected East Asia economies, helping them resume earlier growth rates. This is especially important given the emergence of China as an attractive foreign investment destination.

One statistic makes the urgency of reform in South East Asia very clear: in 1990 China accounted for less than 20% of total foreign investment in developing Asia, and South-East Asia attracted 60%. Today the numbers are reversed.

From an Australian perspective, a rules based business environment is more accommodating to outsiders, especially foreigners, than one based on longstanding relationships. Such an environment would help level the playing field for Australian business in many economies where barriers persist.

History Repeating

It should be said that all economies, including our own, have undergone a transition from relationship-based business to a more open and rules-based approach. Many of the large diverse family owned conglomerates that made up the United States' corporate sector a hundred years ago, for example, are today widely held by shareholders and are managed by professionals in the interests of all shareholders.

And corporate governance remains a dynamic process in developed economies, including Australia. Recent failures of some well-known Australian and US corporations mean regulations and enforcement are likely to be refined. Our experience in creating, enforcing and upgrading the rules for doing business, and for creating the market conditions that support their enforcement, means we are well placed to assist developing economies in the region.

Australia's Aid Program

Australia's interest is to maximise growth and stability in the region. Nothing has illustrated our commitment to stability in East Asia than our response to the East Asian financial crisis, and the emphasis on governance and economic management in our development assistance program.

Australia was one of only two countries (Japan was the other) that committed funds to all three regional IMF second-tier support arrangements in the crisis. Our total commitment amounted to A$3 billion.

Australia has provided substantial bilateral aid targeted specifically at better governance and economic management in the region. In 2001-02, $295 million is being dedicated to improving governance in emerging East Asian economies. This includes helping to improve the rules governments set for business, and the capacity to enforce them in the courts and bureaucracy.

In Indonesia, for example, AusAID provides A$75 million to support economic governance capacity building. In the Philippines, the Governance Facility Program provides A$25 million for corporate and public governance initiatives. In China, the Governance Facility Program provides A$20 million to assist China's transition to a market based economy.

Involving Business

The EAU report identifies many ways in which Australia's business community can contribute to - and benefit from - the transformation underway across East Asia.

Australian business has years of experience in operating in a rules-based business environment. It is well placed to succeed as more rules-based models develop in East Asia. Australian banks and institutional investors, in particular, look set to contribute to the financing revolution underway in the region. And Australian legal, accounting and other business service consultants already are assisting regional firms comply with new standards: demand for these services should expand.

Finally, as markets open to support a more rules based system, Australia's exporters can take advantage of ongoing market trade and investment liberalisation.

Today's EAU report is an important contribution to Australia's agenda, and provides a valuable resource for business and government alike.

I reiterate my congratulations to the authors and sponsors. And I commend the report to you